Retiring with Debt: Affordability Over Elimination, Experts Advise

For decades, conventional wisdom has suggested that people should retire debt-free. Because once your salary stops, your retirement income should fund your lifestyle, not your past borrowings.

However, with home loans now stretching to 25-30 years and people buying homes later in life, an increasing number of retirees may enter retirement with an outstanding loan.

Does that mean they've made a financial mistake?

Not necessarily, say experts. The real question isn't whether you have an EMI after retirement, but whether you can comfortably afford it without compromising your retirement lifestyle.

Why retiring with an EMI isn't always a mistake

While retiring debt-free remains an ideal goal, it shouldn't come at the expense of exhausting your retirement savings.

"While retiring debt-free is an ideal financial goal, it isn’t the only indicator of financial preparedness," says Kundan Shahi, Founder, Zavo.

What matters more is whether the EMI is supported by reliable post-retirement income such as a pension, annuity, rental income or a well-planned retirement corpus. A reasonably priced home loan may remain manageable if it doesn't interfere with essential household expenses, healthcare costs or emergency savings, according to him.

However, with RBI's recent repo rate cuts reducing borrowing costs for many floating-rate home loan borrowers, lower interest rates alone should never be the reason to carry debt into retirement, he points out.

The decision should instead be based on affordability, liquidity and long-term financial security.

Retirees should avoid carrying high-interest unsecured debt, such as personal loans or credit card dues, as these can quickly strain retirement finances, he cautions.

Not all loans are equally harmful in retirement

If you are approaching retirement with multiple loans, deciding which one to repay first can make a significant difference.

The biggest retirement killers are high-cost unsecured borrowings such as credit card dues, personal loans and consumer finance loans because they carry high interest rates without creating long-term assets, according to Balram Bhagat, Managing Partner, Pension Products.

The next priority should be vehicle loans and other borrowings taken for depreciating assets.

A home loan, on the other hand, finances an appreciating asset and usually comes at a lower interest rate. While it should ideally be repaid before retirement, Bhagat says carrying a manageable housing loan may still be acceptable if it is backed by stable retirement income.

His suggested repayment order is simple: Credit card dues and personal loans, consumer loans, vehicle loans and home loan.

"Retirement planning is not just about building wealth. It is equally about reducing liabilities so that retirement income supports lifestyle needs rather than servicing past financial commitments," he says.

How much EMI can you safely carry after retirement?

Unlike the commonly quoted rule that EMIs should not exceed a certain percentage of income, retirement planning requires a more personalised approach.

Retirees should first estimate their monthly essential expenses, including housing costs, medical expenses, insurance premiums, inflation-adjusted living expenses and emergency provisions, says Shahi.

A simple stress test is to ask yourself:

Can I continue paying this EMI if markets remain weak for a year?

Can I still afford it after an unexpected hospitalisation?

Will I have to redeem long-term investments to pay the EMI?

If the answer to any of these questions is yes, the loan may be larger than what your retirement finances can comfortably support.

He also recommends maintaining 12-24 months of household expenses in liquid assets, which can provide flexibility during market volatility or medical emergencies without disrupting long-term investments.

How to strategize EMI payments during retirement

Many retirees instinctively dip into their retirement savings to repay outstanding loans.

Bhagat says this should usually be the last resort.

Instead, retirees should first review all outstanding loans and distinguish between essential and avoidable debt. Where possible, high-interest loans should be refinanced or consolidated to reduce monthly repayments.

He also suggests reassessing discretionary spending, monetising underutilised assets, downsizing to a smaller home where appropriate or earning supplementary income through consulting or part-time work.

Importantly, he advises against liquidating long-term retirement investments solely to become debt-free, as doing so may jeopardise financial security later in life.

"A carefully planned withdrawal strategy, combined with prudent debt restructuring, often delivers better long term outcomes than depleting the retirement corpus," Bhagat says.

How to avoid ending up with an 'EMI retirement'

According to Bhagat, many financial problems during retirement begin much earlier.

He explains that personal finances broadly evolve through three stages:

Accumulation Stage (25-55 years): Focus on wealth creation while keeping borrowings under control.

Transition Stage (55-60 years): Prioritise debt reduction, retirement savings and liquidity.

Reaping Stage (After retirement): Focus on generating predictable income while avoiding new liabilities.

One of the biggest mistakes people make is assuming their future income will continue rising indefinitely. As a result, they finance lifestyle upgrades with debt while postponing retirement planning.

Bhagat says retirement planning should evolve with every life stage. Debt management and wealth creation should go hand in hand rather than being treated as separate financial goals.

Retiring debt-free is a worthwhile goal, but it should not become an obsession.

Experts say the real measure of retirement readiness isn't whether you have an EMI, but whether your retirement income can comfortably support it alongside your day-to-day expenses, healthcare needs and emergencies.